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SABIC INITIATION OF COVERAGE
EQUITY RESEARCH
December 4, 2012
FOOTNOTES
INVESTMENT CASE
CHEMICAL PLAYS: AMONG PRIME BENEFICIARIES OF MONETARY ACOMMODATION
As the global recovery is losing its momentum and signs of sluggish growth are resurfacing, monetary
accommodation is emerging as a crucial policy tool for central banks. Quantitative easing measures
are already underway given: the unlimited bond-purchase program announced by the European
Central Bank on September 6, the third round of bond-buying by the US Federal Reserve announced
on September 13th, and the Bank of Japan following suit by expanding its asset-purchase fund by
$264 billion. Positive stimulus signals have also extended from China with an infrastructure package
of $158 billion approved in early September. As such, with the loosening of monetary policy by
the Fed, ECB and the BoJ to support growth, chances of a stronger recovery in developed markets
and sustained growth in developing markets have increased. Moreover, a likely compromise on the
“fiscal cliff” would help navigate the newly rising uncertainty and would pave the way for achieving
the projected economic growth figures set by the IMF (in the October 2012 World Economic
Outlook). Accordingly, as chemical demand is largely dependent on economic growth and as
earnings of chemical companies closely track the global manufacturing and industrial activities,
chemical producers will be among the first and the largest to build on any gained momentum in the
global economic recovery. Accordingly, the improvement in real demand for chemicals, combined
with the well-paced capacity expansions, should elevate the global chemical utilization rate from its
33-month low of 84.8%.
Table 1: Projected Growth Rates of Key Economies
Real GDP % 2011 2012E 2013E
World 3.8% 3.3% 3.6%
Advanced Economies 1.6% 1.3% 1.5%
US 1.7% 2.2% 2.1%
Euro Area 1.4% -0.4% 0.2%
Emerging Economies 6.2% 5.3% 5.6%
China 9.2% 7.8% 8.2%
India 7.1% 4.9% 6.0%
Source: IMF World Economic Outlook, October 2012
KEY CHEMICAL MARKETS EXPECTED TO TIGHTEN
Despite a bearish demand environment for crude oil, prices are not expected to subdue in the
medium-term with projections signaling a c$110/bbl floor for Brent. The support for crude oil prices
should stem from: 1/geo-political risks in the region 2/ stimulus effect of QE3 by the US Fed and
3/ further stimulus measures by other key central banks. Not to mention that the first two factors
are expected to linger for an undefined period of time, as geo-political tensions are escalating and
the quantitative easing of the US Federal Reserve is widely expected to be the open-ended type of
bond-buying.
On another front, the oversupplied global chemical markets are expected to tighten over next 4-5
years on the back of stronger chemical demand, as a recovery in developed markets and strong
growth in emerging markets lead to additional demand. Global demand for ethylene, the most
common basic chemical in the industry, is projected to grow at a CAGR of 4.53% for the period 2011
till 2016. Global capacity for ethylene, on the other hand, is projected to grow at a CAGR of 3.05%
for the same period given limited capacity additions across the globe. The excess oversupply of
ethylene is expected to fall from an estimated 23 million tons in 2011 to an estimated 16 million tons
in 2016. Accordingly, the share of the ethylene surplus of global supply will contract from 15.5% to
9.3% for the same period 1 .
1 Source: Braskem Investor Relations presentation, citing IHS
2